Jim Aspinwall & Geoff Chaplin 
Life Settlements and Longevity Structures 
Pricing and Risk Management

Recent turbulence in the financial markets has highlighted the need
for diversified portfolios with lower correlations between the
different investments. Life settlements meet this need, offering
investors the prospect of high, stable returns, uncorrelated with
the broader financial markets.

This book provides readers of all levels of experience with
essential information on the process surrounding the acquisition
and management of a portfolio of life settlements; the assessment,
modelling and mitigation of the associated longevity, interest rate
and credit risks; and practical approaches to financing and risk
management structures. It begins with the history of life insurance
and looks at how the need for new financing sources has led to the
growth of the life settlements market in the United States.

The authors provide a detailed exploration of the mathematical
formulae surrounding the generation of mortality curves, drawing a
parallel between the tools deployed in the credit derivatives
market and those available to model longevity risk. Structured
products and securitisation techniques are introduced and
explained, starting with simple vanilla products and models before
illustrating some of the investment structures associated with life
settlements. Capital market mechanisms available to assist the
investor in limiting the risks associated with life settlement
portfolios are outlined, as are opportunities to use life
settlement portfolios to mitigate the risks of traditional capital
markets. The last section of the book covers derivative products,
either available now or under consideration, that will reduce or
potentially eliminate longevity risks within life settlement
portfolios. It then reviews hedging and risk management strategies
and considers how to measure the effectiveness of risk
mitigation.

Table of Content

Introduction by Con Keating

1 Life Insurance: Primary and Secondary Markets

Introduction

1.1 History, application and termination of life insurance policies

1.2 Life Insurance policy types and underwriting

1.3 Development of the viatical settlement and life settlement markets

1.4 The parties involved in a life settlement transaction

1.5 The life settlement process

1.6 Legal issues

1.7 Other issues

2 Mortality and Credit Structures, Valuation and Risk

Introduction

2.1 CDS and CDO contracts

2.2 Valuation approach and data

2.3 The Poisson process

2.4 Single life mortality calculations

2.5 Correlation and portfolio calculations

2.6 Rating transactions

2.7 Risk management of a structured life settlements portfolio

3 Structured Products and Securitization

3.1 Securitization

3.1.2 Prestructures

3.2 Structured products

3.3 The risks of structured products

3.4 Modelling

3.5 Life Settlement pool (LSP)

3.6 Conclusion

4 Examples of LSP Securitization: A Principal Protected Fund

Introduction

4.1 A Simple example

4.2 Other pool examples

4.3 Group policies

4.4 Conclusion

Appendix: Sample product description outline

A4.1 Introduction

A4.2 Product description

A4.3 Marketing assessment

A4.4 Modelling and pricing

A4.5 Administration and accounting

A4.6 Conclusion

5 Capital Markets Products: Principal Protection

Introduction

5.1 Bond constructions

5.2 A zero coupon bond

5.3 A coupon bond

5.4 A convertible bond

5.5 Principal protection

5.6 Longevity bonds

5.7 Sharia compliant bonds

5.8 Power bonds

5.9 CIOs and PACs, TACs and VADAMSs

5.10 Equity-linked notes

5.11 Conclusion

6 Structured Financing: Guaranteed Loan repayment

Introduction

6.1 Project financing: Commercial and industrial uses

6.2 Retail product

6.3 Reverse mortgage or equity reversal programme

6.4 Asset swaps

6.5 The pension swap

6.6 A New CPPI product

6.7 Conclusion

7 Life Settlement Derivatives

Introduction

7.1 Longevity bonds

7.2 Asset Swap

7.3 Mortality curves

7.4 Futures and forwards

7.5 Options

7.6 Synthetic pools

7.7 Conclusion

8 Hedging

Introduction

8.1 Hedging longevity or extension risk

8.2 Hedging with inverse longevity bond

8.3 Futures-forwards

8.4 Options

8.5 Caps, floors and swaptions

8.6 Hedging liquidity risk

8.7 Hedging credit risk

8.8 HER (Hedge efficiency ratio) for an inverse longevity bond

8.9 Conclusion

Appendix

Bibliography

Index